Has the Time Come to Reform Public Sector Employees' Lucrative Retirement Plans?

Did you know the average congressman retires on a pension plan that is two to three times more lucrative than those of private sector employees? In fact, disgraced Anthony Weiner is poised to reap over one million dollars in taxpayer-funded pension payouts over his lifetime. Is it time for a change?

slide 1 of 7

What's the Problem?

Applications for government jobs are up—in a declining job market—and with good reason because their low-cost perks and generous pensions make them attractive. Josh Barro, a Walter B. Wriston Fellow, says, "Some 84 percent of state and local government workers have access to a defined benefit pension plan (compared with just 20 percent in the private sector), and roughly 90 percent of retirement benefits earned by public workers come in the form of defined-benefits accruals."1

The funding source for these benefits is taxpayers (the government entities' revenue source). Public sector employees do not produce products that generate revenues, and while some might argue that they provide a service, generally when they do, it is at an efficiency rate that is significantly less than that found in the private sector.

To insure a steady flow of these revenues, government entities increase taxes and fees rather than limit or reduce promised benefits. In addition, pension promises are made with an eye to the political gains without little or no thought given to sound financial plans to provide the necessary ongoing funding for future pensioners.

If you are someone like Anthony Weiner who is entitled to collect over a million dollars worth of such benefits, you may or may not consider that a problem. However, if you are an American taxpayer who is tired of carrying the financial burden of paying for insanely cushy government pensions, you may think the time has come to reform these retirement programs to bring them in balance with those available in the private sector.

Local and state officials (think Wisconsin Governor Scott Walker or New Jersey Governor Chris Christie among others) are examining such plans as a means of bringing their budgets back into balance and with good cause: That's where the money is.

slide 2 of 7

The Root of the Problem

The disparity in public-sector employee benefits to private sector ones is the root of current fiscal problems in states like California, Michigan, Wisconsin, New Jersey and Minnesota. These bloated pensions are an unsustainable burden to these governments. This forces them to pass on the expense to current and future taxpayers vis-a-vis new taxes and higher fees that punish families and businesses in an effort to appease the insatiable appetite for more and more lucrative employee benefits.

How did these state, local and federal governments reach such an untenable position? Three major contributing factors are:

First, there is no competitive pressure on them to control costs so they have continually yielded to pressure from uncompromising unions and special interest groups to offer increasingly more expensive benefits to this segment of workers without having viable plans in place to fund the programs in future years.

Second, many of these plans are protected by law, which makes them difficult, if not impossible, to modify or eliminate.

Third, most of these programs are Defined Pension plans, which obligate the governments to pay out to pensioners regardless of whether or not the fund is solvent. Many of these governments tried to avoid or survive their looming underfunding issues by accounting manipulations, federal bail-outs or raiding other funds, but the financial disparities are obvious. Switching these plans from Defined Pension plans to Defined Contribution plans where employees would start to pay a larger part of the cost of their health insurance and other benefits is one way to close this financial gap quickly.

Are public sector low-cost perks really such a big problem? Yes, they are, according to Paul Kersey who says, "In his analysis of government employee benefits, my colleague James Hohman found that public sector pension and retirement health care was well out-of-line compared to the private sector, costing state taxpayers $5.7 billion annually."3

If pension costs in one state (Michigan) are $5.7 billion annually, what's the total impact of pension costs for the entire United States? What, if any, effect would reducing those costs have on the average taxpayer's tax burden or the economy?

slide 3 of 7

How to Reform the System

While there is no one-size-fits-all magic bullet solution to reforming these retirement plans, there are cost-cutting strategies proposed by officials in states like New Jersey and Minnesota that should generate substantial savings in future years without affecting pensioners.

Governors Tim Pawlenty and Chris Christie (among others) are setting the example in the arena of landmark pension reforms by targeting sweetheart deals brokered between special interests groups like unions and politicians eager to curry favor and snatch up maximum campaign contributions and votes for their re-election attempts.

In a June 2011 article, Governor Pawlenty commented on unions by saying "The truth is the unions are getting a better deal than taxpayers, and they are part of the reason why government is going bankrupt, and we have to fix them and that takes strength, courage and truth."4 Pawlenty comes from a union family and formerly belonged to a union, so he speaks from experience (not opinion) when he backs pension reform and elimination of what he refers to as "sweetheart deals" as a means of balancing government budgets.

Curtailing or eliminating collective bargaining is one key to bringing public sector pensions back under control. Measures such as requiring public sector employees to contribute more toward pensions and health care, raising retirement ages or curbing or eliminating cost of living adjustments (COLA) for pensioners may be other avenues of capping and controlling employment costs for all levels of government.

In New Jersey alone, pending legislation (if approved and signed into law) that would implement cost-cutting measures like those listed above, will save state and local governments over the next 30 years an estimated $132 billion.

A March 2, 2011 Gallup Poll2 reported that 43 percent of the individuals polled favored reducing state worker pay and benefits as a means to balance state budgets. Of those respondents, 51 percent of Republicans favor reducing state worker pay and benefits, while 42 percent of independents favor that method.

Looking at Democratic respondents, only 36 percent favored reductions in this area; obviously, this is a topic of discussion that is generating strong partisan disagreement about the best method of resolution with the disagreement over restricting or eliminating collective bargaining at the crux of the argument.

slide 4 of 7

How Change Benefits Everyone

Pension reforms give state and local governments control over their employment costs and help balance their budgets. Their municipalities become more attractive to new businesses once they have the freedom to eliminate taxes and fees that limit economic growth. However, probably the most important benefit is it gives these states the choice to either put aside these savings to build cash surpluses against future expenses or use them to fund other key services like road and highway repair and maintenance.

Many individuals may wonder how reducing taxes generates more revenue. It works like this: When taxes are lower, those individuals with capital (the so-called wealthy) invest more and create new jobs and commerce. Whenever there is more commerce, more revenue is generated. The net result of decreasing restrictions, regulations and taxes is a healthier, long-term solvency for government. This strategy coupled with effective pension reforms can put the budgets of these municipalities back in the black and on the road to recovery.

slide 5 of 7

Weigh In With Your Opinion

Okay...this is my opinion, but what's yours? Do you agree or disagree with my point of view? I'd love to hear your thoughts on revamping and reforming plans such as these to give the economy a much needed boost. Please share your thoughts using the comments section below.

slide 6 of 7

References

Kellogg, Douglas and Sepp, Pete, "Weiner Qualifies for Taxpayer-funded Pension Payout of Over $1 Million Despite Early End to Congressional Career," National Taxpayers Union (NTU), June 17, 2011, http://www.ntu.org/news-and-issues/government-reform/pensions/617weiner-qualifies-for.html